PRA - NYSE

Good morning. Thank you for attending the ProAssurance Second Quarter Earnings Call. My name is Matt, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Jason Gingerich, VP of Investor Relations. Jason, please go ahead.

Thank you, Matt. Good morning, everyone. Welcome to ProAssurance's conference call to discuss the company's second quarter 2022 results. These results were reported in a news release issued on August 8, 2022, and in the company's quarterly report on Form 10-Q, which was also filed on August 8, 2022. Included in those documents were cautionary statements about the significant risks, uncertainties and other factors that are out of the company's control and could affect ProAssurance's business and alter expected results. Please review those statements. Management expects to make statements on this call dealing with projections, estimates and expectations and explicitly identifies these as forward-looking statements within the meaning of the U.S. federal securities laws and subject to applicable safe harbor protections. The content of this call is accurate only on August 9, 2022. And except as required by law or regulation, ProAssurance will not undertake and expressly disclaims any obligation to update or alter information disclosed as part of these forward-looking statements. The management team of ProAssurance also expects to reference non-GAAP items during today's call. The company's recent news release provides a reconciliation of these non-GAAP numbers to their GAAP counterparts. I'd like to remind you the call is being recorded and there will be a time for questions after the conclusion of prepared remarks. This morning, we will discuss selected aspects of our quarterly results on the call and remind investors to review our Form 10-Q and accompanying press release for full and complete information. On our call today, we have Ned Rand, President and CEO; Dana Hendricks, Chief Financial Officer; Mike Boguski, President of our Specialty Property and Casualty Lines; and Kevin Shook, President of our Workers' Compensation Insurance Operations. Ned, will you start us off, please?

Thank you, Jason, and good morning. Positive momentum continues at ProAssurance as we completed our first full year since the acquisition of NORCAL. The people and process side of our integration is largely completed and we are extremely pleased with all that we have accomplished. The solid operating results for this quarter are a testament to the success of our largest acquisition to date and a hint of what we can expect to see in the future. Our efforts across the organization, specifically in the underwriting and claims areas, are already leading to improvements in the acquired standard in custom physician business and are an important driver of our results this quarter. Dana will walk through the results company-wide and Mike will cover the trends we are seeing in the Specialty Property and Casualty segment. The Workers' Compensation Insurance segment again posted a profit in a tough marketplace and competitive line of business. While both the macroeconomic conditions and more specifically the environment in this line of business remain challenging, we have begun to see signs of positivity that Kevin will remark on as he discusses the segment results in detail. Regarding broader economic conditions, we are mindful of the level of general inflation and consider how this may affect our business overall, the depositor, including higher investment rates in our bond portfolio and rising payrolls that help drive premium growth in our workers' compensation business and the negative of expense pressures that rising costs create. I'd like to note that medical professional liability loss cost trends are not strictly linked to headline inflation figures such as the consumer price index. There are many other factors within each market making up our professional liability business that we feel today influence loss cost trends considerably more than the general level of inflation. While inflationary trends certainly have the ability to become a factor, as we see the market today, jury behavior and social inflation have a greater impact on our view of ultimate claim costs. Now I'll ask Dana to share the results for the quarter. Dana?

Thanks, Ned, and good morning, everyone. For the second quarter, we reported a net loss of $1.7 million or $0.03 per share and operating income of $16.3 million or $0.30 per share. Operating ROE was 5.3%, up about 3 points from the first quarter. Consistent with the first quarter, the impact of the current investment environment drove the difference between the net loss and operating income in the quarter, which I'll discuss further after touching on our core operating results. Our operating income in the quarter reflected continued improvement in underwriting results, the benefit of expense synergies from the NORCAL acquisition and growth in net investment income. Gross premiums written increased almost 13%, driven by an additional month of NORCAL premium in the current quarter given the timing of the close of the acquisition last year and continued renewal pricing gains on the legacy book in our Specialty P&C segment. Additionally, higher audit premium drove an increase in our workers' compensation insurance premiums. These increases were partially offset by a decline in premium at Lloyd's as a result of our ceased participation in Syndicate 6131 for the 2022 underwriting year. Our consolidated combined ratio, excluding transaction-related costs, improved 2.5 points from the first quarter of 2022, driven by higher favorable development in our Specialty P&C business. Despite the improvement as compared to last quarter, our combined ratio increased by 3 points as compared to the second quarter of 2021, reflecting the expected buildup of NORCAL's DPAC amortization post-acquisition following the application of GAAP purchase accounting rules in 2021. Before discussing the components of the combined ratio, I want to remind you that our net loss and expense ratios for 2022 as compared to prior periods are impacted by offsetting amounts due to our change in process of allocating ULAE in our Specialty P&C segment. For the current quarter, that change resulted in a decrease in our consolidated net loss ratio of 2.6 points with an equal and offsetting increase to our consolidated expense ratio. Note, the change had no impact to our total expenses, combined ratio or operating results. Excluding the change in ULAE, our consolidated current accident year net loss ratio was essentially unchanged as compared to the second quarter of 2021. While we reduced NORCAL loss ratios and certain loss ratios in our legacy standard position book during the second half of 2021 to reflect improvements in the business, this beneficial impact was muted by a prior year ceded premium adjustment in the current quarter as well as the impact of changes in the mix of business, primarily driven by a large nonrecurring tail premium in the prior year quarter. We recognized $19 million of favorable development in the quarter, the majority of which came from our Specialty P&C segment. However, all operating segments, excluding Lloyd's, contributed favorably. Our consolidated expense ratio, excluding the change in ULAE and transaction-related costs in each period was 4.6% higher than the prior year quarter, driven by the buildup of NORCAL's DPAC amortization as mentioned earlier and the impact of the nonrecurring tail policy premium in the prior year period. Also contributing to the increase in expense ratio was a larger accrual for performance-related incentive plans, reflecting our improved operating performance and an increase in other compensation-related expenses. Net investment income grew 26% to $22 million in the quarter, driven by the addition of NORCAL's investment portfolio and the positive effect of rising interest rates as our average book yields begin to increase due to reinvesting at higher rates as our portfolio matures. Although lower than the prior year quarter, our LP and LLC portfolio produced $7 million in the quarter. The investment markets remained a challenge for fixed income investors this quarter as interest rates continued to rise on fears of general inflation and actions by the Fed to tame it. These interest rate increases contributed to net investment losses of $24 million recognized through earnings, leading to the net loss in the quarter. Net investment losses were primarily related to changes in the fair value of our convertible securities and our bond funds, which are classified as equities. A portion was also related to net realized losses on the sale of some holdings classified as equities. Rising interest rates also led to an additional $109 million of after-tax unrealized holding losses on our fixed income portfolio. These unrealized losses flow through our other comprehensive loss directly to equity, accounting for most of the decline in book value. As emphasized in my remarks last quarter, we have an investment approach that holds the vast majority of securities until maturity. Therefore, we consider the changes in fair value driven by these rising interest rates to be temporary. Continuing to reinvest at higher rates is beginning to increase our average book yield and should have a meaningful impact on our future earnings. We are content to take this result as a tradeoff for temporary fixed income price decline. I'll note that current bond reinvestment rates are approximately 125 basis points to 200 basis points higher than our reported average book yield for the current quarter. Overall, our quarterly operating earnings continue to show improvement, evidence that the strategies we've employed are working. With that, I'll turn it back over to Jason.

Thanks, Dana. Now we're going to pivot to Mike Boguski for commentary on the Specialty Property & Casualty segment. Mike?

Thank you, Jason. The Specialty P&C segment produced positive results in the second quarter, driven by top line premium growth related to the NORCAL acquisition and improved accident and calendar year loss ratios. In addition, the quarter included the benefits of continued re-underwriting and prudent expense management across the segment. We continue to be pleased with the strategic value provided by the NORCAL transaction and our integration progress to date. Gross written premium increased by 18% to $168 million, primarily as a result of the NORCAL acquisition and also included solid renewal price increases and consistent new business results despite the continued competitive marketplace. Overall, premium retention was 84%, including 86% retention in the Standard Physician business reduced by a 72% retention in the specialty health care book as a result of re-underwriting efforts and continued focus on the bottom line. The specialty health care retention results reflected the loss of 3 large accounts representing $5 million of premium writings. We delivered strong premium retention of 95% and 92% in our medical technology and small business units respectively. The current accident year net loss ratio for the second quarter improved year-over-year. Direct comparisons to the prior periods in 2021 are influenced by purchase accounting and ULAE assumptions resulting from the NORCAL transaction as noted by Dana. The current accident year loss ratio improved 5.3 percentage points, driven by a 2.4 point improvement in the NORCAL book, primarily as a result of the focused underwriting efforts on the NORCAL business, which currently runs at higher average loss ratios. We are pleased with the NORCAL re-underwriting efforts as we continue to focus on bringing the loss ratios in line with the legacy ProAssurance book. In addition, we continue to be encouraged by lower than historical frequency in our healthcare professional liability business which we attribute to a combination of our continued underwriting efforts in the COVID-19 pandemic. We remain cautious in recognizing the full impact of this trend in our current accident year loss ratio estimates due to the long-tailed nature of our health care liability claims and the uncertainty of the pandemic impact. We recognized net favorable prior accident year reserve development of $17 million in the second quarter compared to $11 million in the same period of 2021. Favorable development in the quarter included $3 million related to the beneficial amortization of the purchase accounting adjustments on NORCAL's reserves compared with $2 million in the same period of 2021. Excluding the prior year impact of purchase accounting related to NORCAL's DPAC, the change in estimate of ULAE and year-over-year changes in tail premium, the expense ratio increased 1.1 percentage point as compared to the same period in 2021. The increase in the ratio was related to a higher volume of premium, subject to broker commissions in the NORCAL book. This was partially offset by the impact of our continued focus on operational excellence, disciplined integration in the NORCAL transaction and the benefit of higher earned premium levels. In summary, this segment continues to move forward in a positive direction with respect to our competitive position, improved underwriting results, the integration of NORCAL and overall performance. The integration efforts with NORCAL in 2022 are focused on information technology system and back-office consolidation, which continue to remain on target. Thank you. Jason?

Thanks, Mike. Kevin, will you bring us up to date on the Workers' Compensation Insurance and the segregated portfolio cell reinsurance segments?

Thank you, Jason. I will. The Workers' Compensation Insurance segment second quarter 2022 underwriting result and combined ratio were relatively flat compared to 2021. The reported combined ratio of 99.8% reflects a decrease in the net loss ratio, offset by an increase in the expense ratio. The combined ratio, excluding intangible asset amortization and the corporate management fee was 96.7%, an indicator of the results of our ongoing business performance. Gross written premium increased for the second quarter, driven by payroll audits and related premium adjustments, partially offset by lower new business and renewal rate decreases. Audit premium in our traditional book of business increased $3 million quarter-over-quarter, indicative of the payroll rebound after the lifting of pandemic restrictions in our underwriting territories. Consistent with the first quarter of 2022, we did not adjust our earned but unbilled audit premium asset with the recorded audit premium in the second quarter, representing actual processed audits. We will continue to monitor process audit activity and the impact of wage inflation on the EBO assets in future quarters. Premium renewal retention was 88% for the second quarter compared to 85% for the same period last year. Renewal price decreases in our traditional book of business were 5% in 2022 compared to 3% in 2021 and new business decreased $2.5 million quarter-over-quarter, both indicative of the continued highly competitive pressures in the workers' compensation marketplace. We remain focused on retaining profitable accounts and maintaining our underwriting standards to secure new business. The calendar year net loss ratio decreased to 67% in 2022, reflecting a lower current accident year loss ratio. The current accident year loss ratio decreased 1 point to 72% compared to the second quarter a year ago, reflecting an improvement in loss trends. As we reported in the second quarter of last year, the 2021 accident year loss ratio reflected increased claim activity as workers return to full employment with the lifting of pandemic-related restrictions in our underwriting footprint. Favorable development was $2 million in both 2022 and 2021. During the first 6 months of 2022, the claims operation closed 38% of 2021 and prior claims, representing one of the best claim closing percentages in the last 10 years. Our expense ratio increased during the second quarter compared to the same period last year, largely due to higher general expenses from team member compensation and an increase in business-related travel with the full return to normal business activities and events this year. I'll finish with the Segregated Portfolio Cell Reinsurance segment. This segment reported a loss of $352,000 for the quarter, which included underwriting income of $580,000 that was more than offset by unrealized investment losses. We renewed all the captive programs that were available for renewal during the quarter. Jason?

Thank you, Kevin. Now I'll turn back to Ned for a review of the results from Lloyd's. Ned?

Thanks, Jason. The Lloyd's segment reported a profit in the second quarter and just under half the level of premium written in 2021. For the 2022 underwriting year, we are continuing participation of 5% in Syndicate 1729. Syndicate 6131 ceased underwriting on a quota share business with Syndicate 1729 and its applicable business will be retained within the syndicate. The Lloyd's investment has reduced portion of our business compared to earlier years, we are pleased to see continued profitability from this segment. You heard us say when the NORCAL transaction was announced that it was not yet time for congratulations. Rather congratulations should come after the companies had been successfully integrated and we're beginning to perform as one. While we still have some work to do, I believe it is now appropriate with the success we have had in our integration efforts to congratulate everyone on the ProAssurance team who has worked so hard over the last 12 months to bring these two terrific organizations together. That wraps up our review of the consolidated and by segment results for the quarter, and our team would be pleased to answer questions.

Thank you, Ned. Matt, that concludes our prepared remarks, and we are ready for questions.

[Operator Instructions] The first question is from the line of Matt Carletti with JMP.

Ned, you started off your opening comments with some comments on inflation and around how some of the broader but your metrics might not be as applicable to your business and things like jury behavior and social inflation might be more pertinent. So I was hoping you might be able to dig into each of those items a little more and just update us kind of how your view of the world is as it relates to those.

It's a great question and one that we, as you might imagine, have spent a considerable amount of time on. I think there's always been a disconnect between the broader-based CPI and medical inflation. And for a long period of time, medical inflation actually ran well above CPI. But what we've seen over the last couple of years is that the medical inflation kind of has come down, more in line with CPI and that as CPI has risen, medical inflation has not. Now that's likely to change over time, especially as some of the increased cost of staffing within medical organizations continues to go up, likely to see CPI on the medical side begin to catch up to CPI on the general side. But -- and while we often use that medical CPI as a proxy or severity trends, it's not a perfect measure. And I think not a perfect measure for a number of reasons. As we mentioned in the call, jury behavior and social inflation and when we talk about social inflation, that's really inflation beyond CPI where for -- driven by broader societal trends, we see jury behaviors in particular willing to award larger and larger verdicts have a more influential impact on the medical professional line of business. And that's always been the case. And I think you've heard us talk about our concerns about social inflation for a number of years now and that certainly hasn't changed and has certainly -- those concerns have been built into the reserving process for quite a while. Another thing that does impact I think ultimate resolution of claims is policy limits. And those policy limits often will act as a limit or a dampener on what gets awarded ultimately or where claims ultimately settle. As an industry, we've been writing largely $1 million policy since 1975. And so as inflation kind of drives up the value of the dollar, that $1 million limit on the policies has had more I think of an impact on moderating some of the trend as time has passed. So I hope that answers your question, Matt.

It does. And then if I can, just a couple of numbers questions for Dana. On -- you talked a bit about kind of the pluses and minuses on the expense ratio within Specialty P&C. Is there any help you can give us with -- now with NORCAL kind of behind us, kind of anniversarying the close, how should we think about your kind of run rate expense ratio is -- it feels like maybe Q2 had a couple of things in it, has not been a little bit hot, but that directionally is probably the right direction. Am I thinking about that right?

I think as you think about our expense ratio inside the Specialty P&C segment, the buildup of that DPAC amortization over the course of the past year, we've talked about how that has been favorable to the expense ratio quarter after quarter. It continues to build. With the second quarter now 1 year post-acquisition, that DPAC amortization is at what we view to be a normalized run rate so you can expect -- other than that, in terms of the expense ratio, there may be minor fluctuations, but not -- we're not expecting significant fluctuations and we've certainly normalized for what has been the most meaningful variable over the course of the past year.

Great. And then the other question, just if I could, on investments as we think about both the investment income line as well as the equity and earnings of consolidated subsidiaries of the LPs and some of the tax credit partnerships, is there anything we should -- I'm trying to get a sort of refresher on if there's anything that's kind of a direct kind of 1-quarter lag reporting that we should think about as we look to Q3 in terms of what might have already happened in Q2?

So in terms of what's occurring on a lag, our LPs and LLCs that portion of our investment portfolio does in fact report on a 1 quarter lag. So as you're thinking about that portion of our portfolio and income that might be generated from that, looking forward, you do need to consider that lag in terms of our net investment income and what you might expect there. I would just encourage you to sort of take a look at our investment portfolio as we have it outlined on our investor website so that you can get a sense of the portion of the portfolio that's maturing over the coming quarters and then consider the reinvestment rate that we're looking at now to sort of determine what yields you might want to project going forward.

The next question is from the line of Paul Newsome with Piper Sandler.

I was wondering maybe if we could step back and now that your NORCAL is finished and revisit kind of the long-term journey that you hope to make to an underwriting profit in the specialty commercial business. How do you see that working out over the next several years? And what are the things that we really need to accomplish, whether it be rate or the underwriting or whatever to get there?

Yes. Maybe I'll start and then -- yes, that's a great question, Paul. I'll start and then let Mike come in. You said NORCAL being finished. We still have a lot of work to do. I don't want to understate that. We have a lot of the front office sort of stuff, the client-facing things done and we go to market as one company, and I think that's incredibly important. But there's still a lot of opportunities in the integration of the back-office and IT systems of the two companies that will further drive benefits for the organization into the future as those are accomplished. So a lot of work has been done, and we're really excited about the work that's been done. A lot of work still to do. And a part of that, that gets to the answer to your question, which is we really -- we need to continue to drive and Mike and his team have done a masterful job of this, our Specialty P&C business and our health care professional liability business, in particular, to be the most efficient, effective organization that it can be and drive that expense ratio down. There's certainly not as much opportunity on the expense ratio side as there is on the loss ratio side. And so a lot of the efforts have been on the loss ratio side and re-underwriting the book, re-pricing the book. But we also recognize that we're in a long-tail line of business, and it takes time to determine whether or not the efforts that you've undertaken are bearing fruit. We believe they will. And to the extent that we have some indications that they are, we're certainly recognizing them. With the pandemic and some of the fog of war that the pandemic has created, I think it just slows down a lot of that ability to recognize what you've done. But with that, I'm going to hand things over to Mike.

Thank you, Ned. Just to add a little bit more color. The underwriting side has gone very, very well. I mean the rates, terms, conditions on the NORCAL book over this past year have improved. The accident year loss ratio has come down, if you really look at it over the past year, around 7, 8 points and we're trying to kind of repeat that over the next 18 to 24 months. So I would describe where we're at is ahead of plan on the re-underwriting side of that book. The other piece to that is, as you're aware, we had really worked on our ProAssurance book over the '19, 2021 period and really got to the targets that we're looking for there. We're a year later on that NORCAL book. So we expect that to play out in the next kind of 12 to 18 months, the additional improvements. So -- and the other thing that I think is really important is we have experienced some significant decrease in the frequency of the NORCAL book as a result of the underwriting efforts and to some degree, the pandemic, which we're being cautious about as we've said in our statements. So we'll evaluate that impact in the third and fourth quarter, but we're pleased with the progress there. And I think just one final item is systems consolidation and innovation presented a tremendous opportunity over the next 18 to 24 months as well. And I think as we get into our final systems and as well as consolidation of statutory entities, there are some other efficiencies we can drive that you won't see in the short term, but you'll see in the longer term. And that's really where we're at. And we couldn't be more delighted with our team, the NORCAL team, the culture and where we're going.

Great. And this is sort of just a -- realized I didn't know this, curious. The surrogated accounts in the workers' comp business, how closely are they integrated today? How much do they work with each other as be as opposed to being separate operations?

So they are separate cells and autonomous from each other in terms of their books of business. But from our side, the claims underwriting risk management is all the same as it is in our Workers' Compensation Insurance segment to Ned's point, if I'm understanding your question correctly.

That was my question, whether or not there was an integration of -- well, curious to segregation of claims and operations, whether or not they matter for each other's scale, but also whether or not there's a distribution overlap as well.

And there is a little bit of distribution overlap. But again, operationally, it's all within workers' comp or Specialty P&C in the case of the MPL, but the cells themselves operate autonomously.

I think a good way to think about the way that Segregated Portfolio Cell business works is more of a fee-for-service model where we're able to leverage the people and the expertise within the HCPL Specialty P&C business and within the workers' compensation business to provide those services to clients that want to self-insure retain risk. But it very much uses the same resources, the same people and allows us to drive some expense efficiencies through the fees that we're able to charge for the services we provide.

The next question is from the line of Mark Hughes of Truist.

Mike, you talked about 7 or 8 points of improvement, I think, in the kind of the goal to be -- to repeat what you've done in the Specialty P&C business. Was that a 12 to 18 months, 18 to 24 months? What did you say in terms of timing? And did I hear that formulation correctly?

Mark, yes, we've been at it for 12 months. And I think in a long tail line of business, you can look at another 12 to 18 months as premiums earned through the book of business and all the underwriting actions that we have taken come to fruition.

And then we issued social inflation. I know you've been wrestling with the issue of whether or not you're really seeing inflation and loss costs in the book. There are some indications, but wasn't so necessarily manifesting itself in your experience. Where do you stand on that? And how much opportunity is there for losses to improve to the extent that you just get more data and it's clear about what's happening within the book of business?

So maybe to expand on some of the things I was saying earlier. I think when you think about the social inflation, a lot of that manifests itself in very large jury awards. And I mentioned earlier that the typical policy we write has a $1 million cover on it. So the impact that social inflation has is it kind of -- it continues to heighten expectations. And even if a claim resolves kind of within that $1 million policy limit drives up where the ultimate resolution is and that becomes harder to trend and quantify. But when we look at that and kind of our historic data and we've not seen an increase in the severity trend that lines up with broader inflation. I think that it varies jurisdiction by jurisdiction and probably run somewhere between 3% and 8% depending on the jurisdiction. But overall, closer to that 3% is what we're seeing severity trend in that first million layer. Now obviously, we write policies with limits in excess of that $1 million. We reinsure most of that business when we do. But it has an impact, even if it's reinsured and kind of what your reinsurance costs are into the future. So it's something we continue to be very mindful of as we think about. The other piece, I think to your question about kind of what about the claims that have come in the door and what are you thinking about those? Mike mentioned a couple of occasions the decline in frequency and claims that we have seen both in the NORCAL book and the legacy ProAssurance book in the legacy ProAssurance book really decline infrequently over almost a 3-year period now. Because of the uncertainty that's created by the pandemic, the slower court systems that slow down the resolution of claims, which kind of leads to lack of clarity about where claims are headed, we've been reluctant to kind of give full credit to that. And what we've assumed largely is that that decline in the frequency of claims will be offset by an increase in the severity of claims. And so that's kind of what where we're on the wait-and-see approach with that. But to date, I don't think we've seen anything that says we see severity going down this trends I mentioned.

And what sort of -- I think you're putting in a higher severity assumption in your reserves. Is that not right, the 3%, aren't you high-single-digits or where do...

Well, again, it depends kind of jurisdiction by jurisdiction, kind of the severity trend, as I mentioned, somewhere between 3% and 8% depending on the jurisdiction. Now it's hard to perfectly quantify that because we've not taken credit for a lot of the decline in frequency, which probably would say that the trend that's baked in is higher because we've not taken into the effect of the decline in frequency.

And then did you give a specific number for gross premiums written by NORCAL in the quarter?

I don't know if we did. We certainly can get that for you. We'll try and get it here while we're on the call and circle back on it.

Okay. And then just a final question around the social inflation issue. Do you -- are you getting enough data points? Is the courts up and running? I mean, are you seeing where the verdicts are coming out or still too early days to get a good line of sight on that?

The court systems is definitely back up and we are seeing for the industry a number of claims in the $10 million to $30 million -- or verdicts in the $10 million to $30 million range and some even larger. Follows on the kind of -- if you think about some of the data that we've shared, and I think actually TransRe pulls this data together very well about verdicts in the space and they were doing that up through 2019, early 2020 and the pandemic hit. It feels like it's kind of normalized back to those same increased levels that we were seeing.

Great.

And gross written premium for NORCAL for all of '22 -- or for Q2 '22 is $52.7 million.

$52.7 million. And then do I have it right that Q1 was $129 million?

Yes.

Yes.

The next question is from the line of Gary Ransom with Dowling & Partners.

I just have a question on the $1 million limits that you mentioned and thinking about if I'm a doctor, how that seems inadequate so that most of them would be looking for more, pressuring for more? Maybe I'm wrong on that, but is there any market pressure for you to start offering higher than $1 million limits more broadly?

And I think we see pockets of it that we don't see it broadly. I think it will come. I think it has to come at some point for the industry. I mean, when you inflation adjust a $1 million number from the mid-1970s, it ends up in excess of $5 million today. And so I would agree with you in the sense that those limits are probably becoming inadequate, is out there. But as I mentioned, they also act as a bit of a limiter today. But that won't always be the case. So I think the pressure does build. And over time, what that time horizon looks like, I don't know, but certainly we fully expect there to be a push for higher limits and a push it's often the limits that doctors carry are determined by the requirements of the hospitals they practice in. I mean, so it very well may be driven by the hospital systems. And we have seen that in some instances where hospital systems are beginning to require that physicians carry higher limits.

Got it. And remind me, is your -- do you reinsure most claims over $1 million? Or is the -- yes, it's okay.

We retain -- yes, so on -- for the health care professional liability business, we retain the first $2 million of exposure and then reinsure above that.

Got it. And then one other long-term question on returns on equity. I didn't -- I couldn't remember if you had said that there's any particular goals that you're trying to get to. But do you have any goals that you're trying to get to over time?

Dana, do you want to take that?

What we're shooting for here is 700 basis points above risk-free rate. And that's what our stated long-term objective has been for some time and continues to be. That's what we're working towards.

And as one free rates go up, that number is getting closer to 10% I guess at this point?

Right. That's right.

Maybe not quite at both, yes. Okay. All right.

There are no additional questions waiting at this time. So I'll pass the conference over to the management team for any closing remarks.

Thank you, Matt, and thank you for everyone that joined us today. We look forward to speaking with you again in 2022.